What is a significant risk associated with cross-border payments?

Cross-border payments involve the transfer of funds between parties in different countries, which inherently introduces various risks. One significant risk associated with this type of payment is increased settlement risk. Settlement risk occurs when a payment is not completed effectively, often due to time zone differences, currency fluctuations, or the potential for one party to default on the transaction.

In the context of cross-border payments, an institution may initiate a transaction while the counterparty in another jurisdiction could face challenges such as regulatory checks, issues with local banks, or exchange rate volatility. These factors can lead to delays or failures in the transaction being settled. Effective management of settlement risk is critical for ensuring that funds are securely transmitted and received on time, particularly when currency conversion is involved.

Each of the other choices does not reflect the complexity and nature of the risks associated with cross-border payments. While lower transaction fees and faster transaction processing are often desirable attributes, they do not address the specific risks that arise from the international context of the transaction. Higher total payment volumes may indicate growing business activity but do not directly relate to the risks inherent in cross-border transactions.